Schaeffer's Investment Research

FEB 11, 2013 3:20 PM

WEN speculators are scooping up 5-strike calls.

Fast-food concern The Wendy's Company (NASDAQ:WEN) is defied broad-market headwinds this morning, attracting a crop of fresh option bulls. As of the time of this writing, the stock has seen almost 3,000 calls cross the tape -- about 16 times its average intraday call volume. Meanwhile, fewer than 130 WEN puts have exchanged thus far.

The at-the-money 5 strike is most active, with almost 1,800 February 5 calls and more than 200 March 5 calls traded. Implied volatility on the front-month call was last seen more than 25 percentage points higher, and volume has exceeded open interest on the back-month call, both signs of newly opened positions. Plus, a healthy portion of the calls have crossed at the ask price, underscoring our suspicions of freshly bought bullish bets.

More specifically, the volume-weighted average price of the February 5 calls is $0.25, meaning the buyers' profit will increase with each step north of $5.25 (strike plus VWAP) WEN takes through the end of the week. Meanwhile, the VWAP of the March-dated calls is $0.29, indicating a breakeven of $5.29. However, even if WEN retreats beneath the $5 level within the options' respective lifetimes, the most the buyers can lose is the initial premium paid for the calls.

So far today, the shares have topped out at $5.33 -- above both breakevens, and matching the stock's 52-week high -- but have since pulled back to the $5.16 level. Bolstering the equity was a bullish Barron's article, which suggested WEN could gain as much as 40% in the wake of its "major transformation," including remodeled stores and a revamped menu.

Even before the upbeat article, though, the options crowd was betting bullishly on WEN. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators purchased 69 calls for every put during the past 10 sessions. Furthermore, the resulting 10-day call/put volume ratio of 69.0 registers in the 74th percentile of its annual range, pointing to a healthier-than-usual appetite for long calls of late.

Echoing that trend, the security sports a Schaeffer's put/call open interest ratio (SOIR) of 0.19, indicating that calls more than quintuple puts among options with a shelf-life of three months or less. Plus, this ratio stands higher than just 6% of comparable readings of the past year, implying that near-term options players have rarely been more call-biased during the past 12 months.

At last check, WEN is up more than 3.2%, and is on pace to end atop its 10-day and 20-day moving averages for the first time since late January. From a longer-term perspective, the restaurateur has advanced 26% since touching an annual low of $4.09 in October.